Global Competition Pushes Tax Reform in Germany

August 8, 2005

As the German economy continues to lag behind its EU neighbors, political support for free-market reforms is growing. As Tax Analysts’ Martin A. Sullivan reports, fundamental tax reform is likely to dominate debate leading up to the national German elections this September:

The leadership of the world’s third largest economy [Germany] is up for grabs, and the overwhelming favorite to be the next chancellor is conservative challenger Angela Merkel, a physicist from the formerly communist East…

You are likely to be told that “Angie” is Germany’s “Maggie.” Like British Prime Minister Margaret Thatcher a quarter century earlier, Merkel would be her country’s first female elected leader. And like Thatcher’s, Merkel’s political philosophy is market-oriented conservatism. You are also likely to come across commentary from conservatives suggesting that Merkel’s election would be another nail in the coffin of the European-style social welfare state.

Like it or not, globalization is opening the floodgates of competition, and around the globe it is washing away all sorts of inefficient economic structures. Germany has more than its share of those. With its high taxes, overly protective labor laws, and bloated welfare, retirement, and healthcare systems, Europe’s largest country provides the prime example of what happens to an economy that inadequately responds to the challenge of mounting international competition: soaring unemployment and flagging income growth.

The lesson for the U.S.? Tax reforms are politically painful since they create short-term winners and losers during transition. As a result, the performance of our own federal tax system may have to get much worse before it gives rise to sufficient political will to make hard choices about eliminating deductions and other holes in the tax base. Read the full piece here (PDF).

[Link via Tax Prof Blog.]

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